Category: Insurance

Premiums are no stranger to a policyholder when one has to part with his money to get insured. However, the topic of premium payment usually surfaces only when you have sat through a long policy explanation by your financial adviser so by the time you have to select your premium payment method, you would probably just agree with your adviser’s suggestions, trusting that it would be the ideal choice for you. Well, that is true most of the time, but paying premium is not as simple as forking out money every month and here are things you need to know before agreeing to that monthly premium payment!

For those who are unfamiliar with the term, an insurance premium is the amount of money an individual or corporation has to pay for purchasing an insurance policy. In short, the cost of your insurance. For the insurers, it represents a liability that they must provide coverage for any claims made under the policy.

Mode of premium payment

The mode of premium payment determines the frequency and method of payment that the policyholder needs to pay to the insurer for the insurance plan.

Difference in premium payments – Single vs regular premium

Although the choice of single or regular premium payment may not be applicable for all policies, it is good to understand what each payment entails.

Single premium requires one to make an upfront payment – that is, pay the entire premium for the policy in one shot. This may be too overwhelming for some as they have to fork out such a large sum of money at one go. Most people are unable to afford such a hefty sum, especially when a longer policy term means more premium required in total.

On the other hand, as the name suggests, a regular premium would require payment at regular intervals be it annually, bi-annually, quarterly, or monthly. For regular premiums, you must be able to keep up with the payments over the long term. Otherwise, the policy may lapse and the policyholder may be at a disadvantage without the desired coverage at critical times. Hence it is always essential to ensure that you are able to upkeep the premium amount throughout the policy term.

Premium Payment period (sometimes dependent on policy terms)

Premium-paying term is the total number of years the policyholder is required to pay the premium. Usually, the premium-paying term would be the same as the policy term. However, some policies grant the policyholder some flexibility in premium-paying term. A shorter term would allow you to complete your premium payments earlier while a longer term enables you to fork out a smaller amount for each payment. Regardless of the term chosen, you will still enjoy the coverage for the entire policy term. However, a shorter premium-paying term means that the policy would be able to accumulate more cash value and hence give a higher surrender value.

Frequency of payment

The most common dilemma would be the frequency of premium payments. Does it matter if you pay annually, bi-annually, quarterly or even monthly? Of course it matters! As a general rule of thumb, a higher frequency payment entails a smaller denomination per payment BUT higher total cost. Paying annual premium helps to cut down on policy costs as annual payments have better rates than monthly payments. You can actually save up to 7-9% in total costs when you pay annually instead of monthly!

The rationale behind the cost difference is the uncertainty in cashflow for the insurers when payments are made in intervals as compared to a lump sum payment. The higher cost also includes the additional collection cost required to process frequent payments.

How to choose the frequency of premium payment?

While the argument for annual payment is appealing, there are other factors of consideration you should think about before making your choice.

Factors of considerations:

#1 Cashflow (liquidity)

If you are a student or fresh graduate trying to get by with your monthly income or starting salary, a large lump-sum payment would limit your cashflow significantly. Also you never know when you might need some additional cash after you have made your annual payment!

#2 Opportunity cost

If you can find a way to grow your money such that the returns are greater than the extra costs of monthly payment, maybe it would be wiser to go ahead and invest your money instead.

#3 Refund after termination

Most insurers would not refund your paid premiums so you might run the risk of losing your paid premiums after making annual payments (or even single premium) if you terminate your policy later on. As such, it is important that you are 100% sure that you need this policy before committing to an annual payment.

Other things you should know about

#1 Level premium vs flexible premium

Whether the premium is level or flexible is usually embedded in the policy so it would not be dependent on the policyholder.

Stepped premiums: insurance premium increases each year as you get older. Stepped premiums are usually cheaper at the beginning but the increasing costs may mean that level premiums are likely to be cheaper in the long run.

More suitable for those who intend to get a new plan as they age or those who are financially tight in the short term and prefer more economical premiums at the beginning of a policy.

Level premiums: insurance premium stays the same throughout the policy term. It is generally more expensive than a stepped premium in the beginning and may have slight increases due to inflation adjustments.

More suitable for those who would want a greater control of costs over time and those who would have the same life insurance for a long time.

#2 Failure to pay premium

What happens if you are unable to pay your premiums on time?

Grace Period

If you fail to pay your premiums, insurance companies typically have a one-month grace period with no interest charged.

Automatic Premium Loan (APL)/ Non-forfeiture Loan (NFL)

However if you exceed the grace period, the insurer will automatically take a loan against the policy’s cash value (if the policy has sufficient cash value) to pay for the overdue premium. While this keeps the policy in force, interest would have to paid on this loan.
If the NFL together with accumulated interest is more than the cash value of the policy, the insurance company terminates the policy.

Premium Holiday

As its name suggests, a premium holiday is when you take a break from paying your premium for a certain period of time (for as long as the policy has sufficient cash value to keep it in force).

Paid-up value / Reduced Sum Assured

A policy with sufficient cash value may be converted into a paid-up policy whereby you need not pay any more premiums and your policy would still be in force for a reduced sum assured for the rest of the policy term.

Reinstating your policy

After your policy lapses, you may choose to reinstate it within a given period, as long as certain conditions (as stipulated by the insurer) are met.

Been doing lots of research, but not sure who to engage to take the final step? Look no further! fundMyLife connects you to credible and incredible financial advisers privately and anonymously, based on the financial planning questions that you ask. We aim to empower Singaporeans to make financial decisions confidently.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

Self-sufficiency, or in easier terms, being able to cover your own ass just in case. What else does this remind you of? Yup, you guessed it – insurance. Think about having insurance as the ability to build your house from the ground after it gets blown away by the big, bad wolf. With insurance, you’ll save yourself the monetary stress!

Insurance is protection, it protects your assets and loved ones. In fact, getting insured is a critical component of financial planning. Yes, we know the pain of having to deflect long-lost friends who are suddenly interested in your lives upon graduation, but they mean well.

Having insurance does three things:

Safeguards your interests in the event of an unfortunate incident

Manages risks by alleviating the impact of risk factors in life and

Gives you peace of mind in securing the future for yourself and your loved ones

Step 1: Review your current insurance policies. Check with your parents, or the company that you work for – you might already have several policies with them. It is important that you determine which policies you already have to avoid buying additional ones you don’t need.

Step 2: It’s actually better to be kiasu here! Do your research and clarify doubts via established online forums like Seedly, DollarsAndSense and MoneySmart.

As a head start, here’s a list of four major types of insurance policies:

Step 3: Know your budget. You should not have to give up important needs (i.e buying a house) to pay excessively high premiums (the amount you have to pay for an insurance policy).

Step 4: Find an insurance agent that you trust and will always have your best interests at heart. With a good insurance agent, you’ll be able to construct the most value-for-money insurance plan that best fits your needs at different stages in life.

Which policy should I choose?

We’ve already established the variations of existing policies, but we understand if you’re still wondering which to get first. As someone who’s entering the workforce, getting health insurance should be the highest priority, followed by life insurance. Hybrid policies might be extremely attractive, but shouldn’t take precedence over the two main types of policies, especially in the first few years of your career.

Health Insurance Policies

Paying bills as an able-bodied adult sucks, add sky-high medical expenses to the mix and you’ve got yourself a living nightmare. Health insurance protects you from crazy expensive medical bills and even serves as income support should you need to be at home to recuperate.

Medical Expense Insurance:

Are you a Singaporean with CPF? Congratulations! MediShield Life is a basic health insurance plan which covers your major hospital bills. The premium for MediShield Life can be covered by your Medisave account, or your CPF. MediShield Life covers medical expenses in Class B2/C wards in public hospitals only.

You can increase your coverage by upgrading to an Integrated Shield Plan (ISP). Benefits of the standard ISP include coverage of medical expenses in Class B1 wards. If that’s not sufficient, you can one-up the coverage by getting the premier ISP. It covers expenses in Class B1/A wards and in private hospitals. You can use Medisave to pay for upgrades as well.

Critical Illness Insurance:

Unseen costs arrive when you fall critically ill, in addition to the time off from work. The cash pay out from this policy can function as a source of income to pay for living expenses while you recover. The premium for a critical illness policy is much higher and will terminate once you’ve received the full pay out. Weigh out the costs and benefits of getting this policy, before making your decision.

Disability Income Policy:

This policy provides a steady stream of monthly pay outs should you suffer a disability that renders you incapable of working. The definition of ‘unable to work’ usually depends on the insurance company and is extremely strict – so always read the fine print!

Life Insurance Policies

Life insurance policies protect your love ones, including your spouse or elderly parents, in the event of a financial loss. Should an unfortunate incident occur to you, a cash pay out will be provided to them. We know, it’s pretty morbid, but all the more necessary.

Term Life Insurance:

This policy insures you for a certain period of time. It is a lower premium compared to whole life insurance, allowing you to use the excess cash for investments or other important necessities. On the flip side, it’ll cost you a whole lot to extend your life insurance coverage. Do yourself a favour and think through the coverage period you’ll need wisely.

Whole Life Insurance:

You’ll be insured for life, or at least until you’re 99. This is a near guaranteed pay out, as most of us will probably be gone by then. The savings element within the policy guarantees a substantial pay out, if you decide to surrender the policy before death.

However, you would have to fork out a higher premium than term life insurance, given the same amount of coverage. The cash value that you get from surrendering your policy will also be lower than that, in the event of your untimely demise – so don’t fall into the trap of seeing whole life insurance as another savings plan.

Hybrid Policies

Policies of these kind provide both protection and investment. These plans generally require long time commitment and your money gets locked away until maturity. This means that it’s less suitable for those with a limited amount of salary.

Endowment Plans:

Essentially a ‘forced savings’ plan. You pay a fixed premium monthly, quarterly or yearly, and get rewarded with a cash pay out upon maturity. If you have children, you might want to consider endowment plans to invest in and secure your child’s future. Note that guaranteed returns does not equal to the premiums you’ve paid.

Investment-linked Plan:

This policy is part investment, part insurance (duh). The premiums you pay go to investments in sub-funds of your choice and the returns are used to pay for your insurance. ILPs garner high commissions and your long lost friends/agents might push you to go for it – but exercise caution as it only has the potential of high returns. As you age, the premium for the insurance component also increases, meaning less money to invest in. You might just end up paying most of your premiums towards protection.

Ultimately, you have the final say. The amount of insurance coverage you’ll need really depends on your personal needs and stage of life. You should understand your options thoroughly and think about your long-term budget when deciding if you’ll need to buy them. You could always get into a debate with your insurance agent to understand their point of view as well. Remember to always choose wisely!

Been doing lots of research, but not sure who to engage to take the final step? Look no further! fundMyLife connects you to credible and incredible financial advisers privately and anonymously, based on the financial planning questions that you ask. We aim to empower Singaporeans to make financial decisions confidently.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.